Smith slams bank profit inquiry

The chief executives of the major banks will be forced to defend their earnings before a Senate inquiry, established yesterday, after
ANZ Banking Group
announced a record $4.5 billion full-year profit.

As the political tension around bank competition intensified, ANZ chief executive
Mike Smith
questioned shadow treasurer
Joe Hockey
’s economic credentials and warned that his ideas were dangerous to the economy.

“I think it’s a shame it has come to this," Mr Smith said of Mr Hockey’s nine-point plan, which included setting up a banking inquiry.

“It’s a real shame that the Liberal Party’s economic credentials have been somewhat hijacked by what is a sort of out-there set of proposals."

The inquiry – Parliament’s seventh into the topic of banking competition in two years – came as Mr Hockey extended his push for a shake-up of the sector by suggesting the government’s deposits guarantee be limited to small financial ­institutions.

Related Quotes

Company Profile

But the federal government continued to insist yesterday that Mr Hockey wanted to regulate interest rates. Prime Minister
Julia Gillard
said Mr Hockey was going back “30 years in time".

“We will not be joining him in a strategy designed to impoverish the nation," she said.

Mr Smith said Mr Hockey’s proposals were unworkable.

“Some of the initial proposals that have emanated from the shadow treasurer would have had a massive economic impact on the country and to the average Australian," Mr Smith said.

“I think these things should be thought through and properly considered before people start talking about them."

He also quipped that Mr Hockey appeared to have taken economic lessons from Venezuela’s socialist President,
Hugo Chavez
, and noted ANZ’s customer satisfaction rating was 80 per cent, “which I suspect is somewhat higher than what Mr Hockey’s are right now".

Mr Hockey, speaking before Mr Smith made his comments, was unrepentant about his plans. “Bank CEOs can shoot me, they can decry me, they can have a go at me, I don’t mind because we are standing up for consumers, we’re standing up for small business, we’re standing up for the people that are missing out on more competition in banking."

ANZ’s full-year underlying profit of $5 billion was 33 per cent higher than the profit it made in 2009 and 5 per cent higher than consensus analyst forecasts. The dividend was also bigger than expected, 74¢ a share compared with an interim dividend of 52¢.

The share price surged 69¢, or 2.8 per cent, to close at a five-month high of $24.73.

Underlying profit is ANZ’s preferred earnings measurement and strips out many one-off items. The bank’s statutory net profit for 2010 was $4.5 billion for the year, 53 per cent higher than 2009.

While ANZ’s full-year profit marked a new record for the bank, when expressed in terms of return on assets, Mr Smith said the bank was actually underperforming. ANZ’s ROA for the half was 0.94 per cent and Mr Smith said a figure of between 1 and 1.2 per cent was reasonable.

Australian Competition and Consumer Commission chairman
Graeme Samuel
said last week he might need more power to prevent banks from potentially fixing their prices by signalling how they planned to respond to moves in official interest rates.

Asked about this, Mr Smith said he could understand the ACCC’s concerns if bank chiefs had actually flagged their planned interest rate moves, but this had not happened.

“The fact that you comment on whether rates are going to go up or down . . . that’s our business," he said.

He flatly rejected the need for another banking inquiry, saying Australians should be proud of having one of the world’s strongest banking systems.

“We know of countries that are coming down to Australia to learn why Australia was able to keep its banking system intact and in good shape during the crisis . . . Australia is perhaps the most successful OECD [Organisation for Economic Co-operation and Development] country in terms of its banking system. It’s not broken, what are they going to inquire about?"

The government has been under pressure to intervene in the banking sector since bank chiefs started warning they were considering lifting mortgage rates outside official rate moves.

“The government is not lifting a finger to create more competition in banking," Mr Hockey said yesterday.

“So for everyone with a credit card, everyone with a home loan, every small business with a loan, I would say to you, you should be angry because you are missing out."

Mr Hockey’s call for a banking inquiry won the support yesterday of South Australian independent
Nick Xenophon
, who moved with Liberal senator David Bushby and Nationals senator John Williams to establish the inquiry through the Senate economics committee.

“My promise to the banking association is that this won’t be an inquiry like any other that you’ve had for the past few years," Senator Xenophon said.

“Expect a very forensic analysis of your practices, of your margins, the way you do business and the fact that it is so difficult for Australians to switch banks."

Senator Bushby said bank chief executives would be invited to give evidence, but warned they could be compelled to attend if they refused.

“I know Treasury has done work on this and we will be testing that against what some of the banks have been saying."

But he said the inquiry would not be examining the need to use a power of the Reserve Bank to fix interest rates, which he asked Treasury about in a Senate estimates hearing last week.

“We don’t need to increase regulation of banks; what we need is more competition. There have been a number of inquiries in the last few years but most have been focusing on quite specific aspects of ­banking."

The Australian Bankers Association said the claim that banks were making record ­profits due to reduced competition was false.

“In the past two years, banks have slashed or removed altogether a range of unpopular fees."

Mr Hockey’s push for a comprehensive inquiry into the banking sector was supported by a member of the 1996 inquiry into banking, Ian Harper.

He said a new inquiry like the 1996 Wallis inquiry, and new measures – such as covered bonds – to promote competition were urgently needed before the likely end of the government deposit guarantee next year.

He said while measures to ensure financial stability had been valid during the global financial crisis, it was now necessary to unwind those and support competitive efficiency in the market.